How News Affects the Stock Market

How News Affects the Stock Market

News can make the market go up and down, here’s why!

In January this year, the U.S.-based Hindenburg Research released a report accusing the Indian conglomerate Adani Group of stock manipulation and accounting fraud. The report received widespread media coverage, causing Adani’s stock prices to plummet. The founder and chairman of the Adani Group, Gautam Adani, lost US$34 million of his net worth in just a week after the report was released. 

While the Adani Group has tried to make a strong rebuttal of the report, they are yet to completely bounce back from the damage. If you are wondering how news can have such a drastic impact on a company’s value, here is a detailed look. 

What kind of news can affect investor behavior?

News can heavily impact investor behavior, whether it’s good or bad. Positive news such as strong earnings or a new product/service release can attract more investors, leading to a rise in stock value. For instance, when K-Pop company YG Entertainment announced that one of their biggest groups, BlackPink, would be releasing new songs in July last year, their stock rose by 10%. 

On the other hand, negative news such as a drop in earnings, political or economic uncertainty or changes in company leadership can lead to a drop in stock value. This was the case with Netflix last year when it lost 200,000 subscribers and was projected to lose another two million, which in turn dragged down its share price by 37%. Similarly, when Disney replaced Bob Iger with Bob Chapek as its chief executive officer (CEO) in 2020, the company’s stock value nosedived, falling by 44% as of 2022.

Moreover, bad news for one company or industry sector can be good news for another. For example, a natural disaster like an earthquake or a hurricane might negatively impact the stock value of insurance companies but could positively influence the stock value of construction companies. 

But what really is good and what is bad news ?

Even though news can influence investors behavior, the effect of news isn’t always what you would expect. Sometimes, even if a company reports positive news, such as higher earnings, stock prices may still fall

For instance, let’s say a company announces that its earnings are 5% higher than expected but still lower than the average rise in earnings, investors may decide to sell their shares despite the good news. Similarly, if the company reports a smaller-than-expected loss, it could lead to an upswing in ‌share prices. 

Moreover, there are times when a company’s shares are trading for more or less than their actual worth, known as overvaluation or undervaluation. So, if a company’s value is reported to be undervalued, expert traders might use a fall in stock prices as an opportunity to buy more. They do so expecting that once the company starts to perform better, the share prices will rise, and they can make a profit. 

Alternatively, in some cases, investors may sometimes overvalue a company’s stock based on news reports. This is what happened during the Dot-Com bubble of the 1990s when investors made decisions based on website traffic. This eventually triggered a recession in the U. S. in the year 2000. 

Is news an accurate measure of stock value?

The sheer volume of news in the market can quickly overwhelm even the most experienced investors. To make matters worse, news often changes frequently, leaving investors uncertain about which sources to trust. In light of this, it is crucial to be mindful of the news sources you rely on for investment insights and to consume news in moderation. 

Understanding the impact of news on investment decisions, some traders have become referring to sentiment indicators created by computer algorithms. These indicators can determine whether a news piece is positive or negative and whether it has relevant information about a company, even before the trader reads it. This can give the trader an edge over other investors by helping them cut through the noise and make quicker and smarter investment decisions. 

How should an investor navigate bad news?

Investors are no strangers to the volatility of the stock market, and bad news can often send shockwaves throughout the financial world. When navigating bad news, it is important to keep in mind that stock movements based on news are typically temporary. That’s why seasoned investors like Warren Buffett believe in buying shares and holding on to them in the long term. 

Also, diversifying your portfolio ​​is another crucial strategy to weather bad news in the stock market. By investing in a variety of companies and industries, you can mitigate the risks associated with any one particular stock. 

Finally, it’s also essential to view bad news in a positive light. Negative news can often make you more vigilant about a company’s performance, leading to more careful investment decisions in the future. 

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Header image courtesy of Envato

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